Eric Beinhocker, the director of the Institute for New Economic Thinking at
Oxford, tells the story of Walras, the mastermind of market equilibrium models.
Inspired by his father’s declaration that one of the great challenges remaining from
the nineteenth century was a scientific theory of economics, Walras spent 14 years
working toward a mathematical theory that built on Bentham’s utility and the
related law of supply and demand to make economic systems predictable. After
presenting his market equilibrium equations, Walras concluded that his “pure
theory of economics is a science which resembles the physio-mathematical sciences
in every respect” (Beinhocker 2007: 36, citing Walras).
Beinhocker explains that models built on these laws do not capture what science
knows about behavior, decision-making and complex system dynamics today. Yet,
they are still used to predict future developments and to derive policy
recommendations:
Through the 1990s, economic researchers typically started with a set of principles: for
example, utility-maximizing by consumers and profit-maximizing for firms, far-sighted
individual rationality, and a belief in equilibrium, which meant that structurally, individual’s decisions in the models fit reasonably well together.…By the late twentieth century,
these principles formed the core of economists’ vision of reality, in the sense that all
economic models were built on these principles, or around variations of these principles
like assumptions of bounded rationality or imperfect information (Beinhocker 2007: 460,
citing Collander 1999).
According to all of these models, more production is always better and the price
paid indicates the utility gained from consuming that production. The policy conclusions are easy: meeting the needs of current and future generations means
ramping up productivity as much as we can. This has been the prime goal of policy
and business conduct. Yet, upping the productivity of the fictitious commodity
labor means changing the work life of humans. And often also ending the work life
of humans. What happens to human needs in this process is, as we will see, not part
of the models.
3.1.1 What Is Utility and Where Is It Created?
This section continues the search for an understanding of how human needs can be
satisfied and unpacks the concept of utility and its consumption-based definition.
Digging beneath the market-price indicator for utility (willingness to pay) we see
something that psychologists have called the ‘process benefits’ or ‘experienced
utility’ of the individuals involved in producing what can later be bought. It may
well decline if the amount of what is done in one hour by one person is constantly
ramped up. Or, in accounting terms, the amount paid for the same output falls. This
is what productivity stands for in its conventional definition.
The goal of contemporary psychologists and the economic Nobel Prize-winner
Daniel Kahneman has been to shed some empirical light on the pleasure and pain
that people experience during their everyday activities. His surveys seek to capture
3.1 How Mainstream Economics Views Human Needs and Their Satisfaction
59
Oxford, tells the story of Walras, the mastermind of market equilibrium models.
Inspired by his father’s declaration that one of the great challenges remaining from
the nineteenth century was a scientific theory of economics, Walras spent 14 years
working toward a mathematical theory that built on Bentham’s utility and the
related law of supply and demand to make economic systems predictable. After
presenting his market equilibrium equations, Walras concluded that his “pure
theory of economics is a science which resembles the physio-mathematical sciences
in every respect” (Beinhocker 2007: 36, citing Walras).
Beinhocker explains that models built on these laws do not capture what science
knows about behavior, decision-making and complex system dynamics today. Yet,
they are still used to predict future developments and to derive policy
recommendations:
Through the 1990s, economic researchers typically started with a set of principles: for
example, utility-maximizing by consumers and profit-maximizing for firms, far-sighted
individual rationality, and a belief in equilibrium, which meant that structurally, individual’s decisions in the models fit reasonably well together.…By the late twentieth century,
these principles formed the core of economists’ vision of reality, in the sense that all
economic models were built on these principles, or around variations of these principles
like assumptions of bounded rationality or imperfect information (Beinhocker 2007: 460,
citing Collander 1999).
According to all of these models, more production is always better and the price
paid indicates the utility gained from consuming that production. The policy conclusions are easy: meeting the needs of current and future generations means
ramping up productivity as much as we can. This has been the prime goal of policy
and business conduct. Yet, upping the productivity of the fictitious commodity
labor means changing the work life of humans. And often also ending the work life
of humans. What happens to human needs in this process is, as we will see, not part
of the models.
3.1.1 What Is Utility and Where Is It Created?
This section continues the search for an understanding of how human needs can be
satisfied and unpacks the concept of utility and its consumption-based definition.
Digging beneath the market-price indicator for utility (willingness to pay) we see
something that psychologists have called the ‘process benefits’ or ‘experienced
utility’ of the individuals involved in producing what can later be bought. It may
well decline if the amount of what is done in one hour by one person is constantly
ramped up. Or, in accounting terms, the amount paid for the same output falls. This
is what productivity stands for in its conventional definition.
The goal of contemporary psychologists and the economic Nobel Prize-winner
Daniel Kahneman has been to shed some empirical light on the pleasure and pain
that people experience during their everyday activities. His surveys seek to capture
3.1 How Mainstream Economics Views Human Needs and Their Satisfaction
59